THE BLOG

States and Bankruptcy: Issues and Tactics

02/23/2011 01:21 pm ET | Updated May 25, 2011

Matt Miller's cover story in The Deal magazine, which analyzes the legal issues underlying proposals to allow states to go bankrupt ("The world wonders: Can states go bankrupt?" Feb. 21), is really a superb piece of work. The underlying issue, despite the sound bites you hear on political platforms and on cable shouting matches, is neither legally straightforward nor necessarily easy to implement. Miller has diligently talked to some of the leading bankruptcy scholars -- who, in fact, disagree on the effectiveness or even constitutionality of states filing for bankruptcy. And indeed, the question involves fundamental issues such as states' rights -- Miller points out the irony of Newt Gingrich and Jeb Bush proposing a step that would seriously erode states' rights -- the difference between municipalities and states and the role of federal judges in state matters.

Miller's piece is particularly enlightening given the attempts across the country, triggered in Wisconsin but spreading to Ohio, Tennessee and Indiana, to kill collective bargaining by public-employee unions. It's interesting to read some of the original coverage of Gingrich's proposal that would allow states to file for bankruptcy: The impetus was always the sense that federal bankruptcy judges would break public employee union contracts in order to reduce wages and benefits. Gingrich articulates that yearning to deal with the unions and keep taxes low in this passage from a speech quoted in a Pensions and Investments story on Jan. 10:

I ... hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy, so that states like California and New York and Illinois that think they're going to come to Washington for money can be told, you know, you need to sit down with all your government employee unions and look at their health plans and their pension plans and, frankly, if they don't want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it, and I would make the federal bankruptcy law prohibit tax increases as part of the solution, so no bankruptcy judge could impose a tax increase on the people of the states.


A law that would lash together forced cuts in public-employee wages and benefits and mandate no tax hikes seems feverish, and, based on Miller's reporting, a little incoherent. But it does explain the historical oddity of Republicans pursuing this considerable expansion of federal reach and its confluence with state attempts to ban collective bargaining: It's really about dealing with public-employee unions. As Miller points out, there are some very serious people who see great benefit in a state bankruptcy law. But there are others, like Gingrich, who clearly would like to exploit the step for its tactical possibilities, rarely a good way to develop public policy.

Robert Teitelman is editor in chief of The Deal.

For more from Robert Teitelman, check out The Deal Economy.